A Bull Market in Bank Deposits

TV personality Jim Cramer likes to say "there's always a bull market somewhere." He's right. There are plenty of bull markets today. A handful of stocks are in a bull market. Treasuries are in a bull market. So is gold. And fear.

Another bull market not discussed as often? Checking deposits, which have gone parabolic lately:

Source: Federal Reserve.

This year alone, checking deposits have surged more than 25%, with most of that move occurring in the past few weeks. Mind you, this doesn't include cash held in CDs or savings accounts. This is just readily available checking accounts.

One might pin the surge on monetary printing. But that likely only explains part of the jump. The correlation between deposit levels and money printing is far from one-to-one. Deposit levels can fall when money aggregates are rising, as occurred through most of the 1990s and the middle of last decade, and vice versa.

With interest rates at zero, the vast majority of this money is earning a negative real return. Add in checking account fees, and there's over $1 trillion slowly losing value.

Why would people choose to do this? The likely answer is fear.

The past two months have produced a swell of panic. Even for those who aren't panicking, 2008 taught people that recessions can be different beasts than once imagined. Lose your job? It might be years before you find a new one. Need cash? You can't always use your home as an ATM, buddy. All of this increases the urge to hold cash, even if it means earning a negative real return.

But why not hold the cash in money market funds? Many of those yield close to nothing, too. And as 2008 proved, they aren't foolproof. After the Reserve Primary Fund broke the buck in 2008, the dynamics of the money market world changed. More than $1.3 trillion dollars -- about a third of the total -- has been pulled out of money market funds since early 2009, according to ICI. The chart above suggests a lot of that money found its way into checking accounts, which earn about the same return (nothing) and are FDIC insured.

There are two reasons these numbers matter.

First, when banks are flooded with cash, they ideally do something productive with it. But lately, there hasn't been much opportunity. Loan demand -- at least demand from borrowers deemed creditworthy -- has been meek.

Meanwhile, it costs banks money to hold deposits thanks to fees levied from the FDIC to cover deposit insurance. When you earn close to nothing on deposits (I'm simplifying; the return is positive, but barely) and pay a pretty penny for FDIC insurance, a bank can indeed lose money during a deposit influx.

Take Bank of New York Mellon (NYSE: BK) . Last month, the bank began charging customers a 0.13% fee on deposit accounts over $50 million. (It only deals with large institutions, so it handles more $50 million-plus accounts than you might think.) Deposits were flooding in at levels it simply couldn't keep up with as clients sought "a safe-haven in light of the global interest rate and credit environment," it said. Those inflows likely cost the bank money once FDIC fees were factored in. So fees were hiked.

It's worth considering whether consumer banks like Bank of America (NYSE: BAC) , Citigroup (NYSE: C) , and Wells Fargo (NYSE: WFC) may elect to do the same. Deposit fees from consumer banks likely wouldn't come as a percentage charge like Bank of New York, but instead could be implemented with higher monthly account fees and fewer benefits like cash-back credit cards. The industry has already been moving in this direction, but the new influx of deposits may send the trend into overdrive.

The second reason a flood of deposits matters is more optimistic. Cash is, in a sense, the anti-investment. Demand for deposits rises when people are scared about the future and can't think of anything else to invest in. From a contrarian standpoint, the recent parabolic move upward may indicate blowout levels of panic.

Now remember the iron rule of investing: There's a negative correlation between sentiment and future returns. Sentiment is practically unprecedentedly low right now. What's that mean for future returns? Gives you something to think about.

Fool contributorMorgan Houselowns Bank of America preferred. Follow him on Twitter @TMFHousel.The Motley Fool owns shares of Bank of America and Citigroup. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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